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Relationship pricing:
Minimum spread:
Performance pricing:
Floating-rate loans:
increase the rate sensitivity of bank assets, increase the
GAP
reduce potential net interest losses from rising interest
rates
Because most banks operate with negative funding GAPs
through one-year maturities, floating-rate loans normally
reduce a banks interest rate risk.
Given equivalent rates, most borrowers prefer fixed-rate
loans in which the bank assumes all interest rate risk.
Banks frequently offer two types of inducements to
encourage floating-rate pricing:
1. Floating rates are initially set below fixed rates for
borrowers with a choice
2. A bank may establish an interest rate cap on floating-rate
loans to limit the possible increase in periodic payments
Loan pricing
Markups:
Index rate (i.e., prime rate) plus a markup of one or
more percentage points.
Cost of funds (i.e., 90-day CD rate) plus a markup.
These methods are simple but may not properly account
for loan risk, cost of funds, and operating expenses.
Expense components
Credit Services
Cost of funds
Loan administration
Default risk expense
Noncredit services
Credit services
Cost of Funds
Loan Administration
Non-credit services
Revenue components
2.
3.
customers
2.
3.
4.
Compensating balances
Fee income
Facility fee
the fee applies regardless of actual borrowings
because it is a charge for making funds available.
Commitment fee
serves the same purpose as a facility fee but is
imposed against the unused portion of the line and
represents a penalty charge for not borrowing
Conversion fee
a fee applied to loan commitments that convert to
a term loan after a specified period
asrhgetolu
rdenstoL
oalseT
E
q
u
i
t
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T
argetpofi=T
anm
ount
Target profit
2.
If:
Then:
(r - d - I)SB(M/12) = Ca + (Cc)(M)
BASE RATEW..E.F
JULY,2010
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Some Facts
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RIP.BPLR
RIP.BPLR
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Issues In Transparency
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1.
Deployable Deposits =
Total Deposits less share locked in CRR & SLR
Balances
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4. Return on Deployable
Deposits
(Net Profit//Deployable
Deposits)
=( NP / NW ) X (NW /
Deployable Deposits)
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Yield Curve
Rating of the
Obligor
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http://banks-india.com/banks/bank-base-ratescomparison/
http://thebankingbible.com/iob-andhra-bank-icicibank-sbt-ubi-uco-bank-dcb-ing-vyasa-bank-jk-bankps-bank-vijaya-bank-united-bank-corporation-bankkokatk-mahindra-bank-sbbj-syndicate-bank-revisesbase-rate-and-1567
http://www.corpbank.com/asp/0100text.asp?
presentID=1714&headID=733
http://www.sbi.co.in/user.htm
http://www.corpbank.com/asp/0100text.asp?
presentID=1715&headID=19
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.
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However
Three other categories of loans will
not need to adhere to the base rate
formula
1.loans to banks own employees
2.loans against banks own deposits.
3.DRI Loans
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International Comparison
http://www.federalreserve.gov/releases/h15/data.htm
http://www.federalreserve.gov/faqs/credit_12846.ht
m
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the
benchmark
for
http://www.nytimes.com/interactive/2012/07
/10/business/dealbook/behind-the-liborscandal.html
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thanks
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